Small Industries Development Bank Of India vs Amit Gupta

This is an application filed by the Small Industries Development Bank of India, (‘SIDBI/Applicant’) under sections 60(5) of Insolvency and Bankruptcy Code, 2016 (“the Code/IBC”) against the Liquidator (‘Respondent’) of Provogue (India) Ltd. (‘Corporate Debtor’), seeking direction to the Respondent interalia to treat the Applicant as a secured creditor under Section 53(1)(b)(ii) of the Code for the purpose of distribution of proceeds from the sale of the liquidation assets and consequential reliefs.

The liquidation order of the Corporate Debtor was passed by this Tribunal on 14.10.2019 and the Respondent was appointed as Liquidator. On 26.10.2019, the Liquidator made the Public Announcement and invited claims, pursuant to which the claims were received from the Applicant, as a secured Financial Creditor, amounting to INR 4,93,06,250.15.

The claims of SIDBI arose out of bill discounting facility extended to the Corporate Debtor under ‘MSME Receivable Finance Scheme’ and was secured by way of the following: i. Bills of Exchange accepted by the Corporate Debtor; ii. Residual charge on the movable and current assets of the Corporate Debtor, both present and future; iii. Personal Guarantee of Shri Nikhil Anupendra Chaturvedi, (erstwhile) Managing Director of the Corporate Debtor; iv. Equity shares of 1.30% of the Corporate Debtor.

The claim of SIDBI was admitted by the Liquidator. While submitting the Form D with the Liquidator, the Applicant had chosen not to relinquish the security interest and had therefore mentioned ‘NO’ under column 8A, which reads as ‘Whether security interest relinquished’. Extract of Form D is reproduced below:-

Clearly Applicant did not relinquish its security interest to the liquidation estate of the Corporate Debtor.

On 07.01.2020, the Liquidator filed a report regarding the constitution of the Stakeholders Consultation Committee (“SCC”) pursuant to Regulation 31A of the IBBI (Liquidation Process) Regulations, 2016 (hereinafter referred to as the ‘Liquidation Regulations’) along with the List of Stakeholders. Since SIDBI had chosen not to relinquish its security to the liquidation estate of the Corporate Debtor, it was not included as a member of the SCC.

The Applicant received an email on 20.10.2022 from the Liquidator mentioning therein that as per amended the IBBI (Liquidation Process) (Second Amendment) Regulations, 2022 issued on 16.09.2022 and in compliance to the same, the Liquidator in accordance with Regulation 31A of Liquidation Regulations has re-constituted the Stakeholders Consultation Committee and now the said Committee includes the Applicant herein. In furtherance to the above mail a meeting of all the Stakeholders Consultation committee was held on 27.10.2022 and the Applicant also attended the same through its representative.

Thereafter, the Applicant sent an email on 28.10.2022 to the Liquidator with respect to the distribution to secured lenders in Liquidation and further requested to allocate the amount to the Applicant on pro-rata basis towards its claim. The Applicant also relied on NCLAT judgement dated 26.05.2022 in the matter of Bala Techno Industries Ltd. for distribution on pro-rata basis.

In response to above email, the Liquidator replied on 09.11.2022 as follows:

The Applicant sent another email on 16.11.2022 to the Liquidator pointing out that the Applicant has not complied with the Regulation 21A(2) of the Liquidation Regulations and as such the security formed part of the Liquidation Estate.

The Liquidator responded to the Applicant’s email on 17.11.2022 as follows:

The Liquidator realized the error in including the Applicant as a member of SCC and re-constituted the SCC by removing SIDBI from the SCC. The Liquidator filed an application bearing No. IA/321/2023 to place on record the revised report with respect to the re-constitution of the SCC. The revised SCC reconstitution report was taken on record by this Tribunal on 30.01.2023.

The Applicant submits that though admittedly, it did not relinquish its security interest to the liquidation estate but neither did it take steps to realise its security interest nor the Liquidator called upon the Applicant to do so.

The Applicant relies on Regulation 21A(3) of the Liquidation Regulations to contend that since Applicant being a secured creditor, failed to comply with sub regulation 2 of Regulation 21(A), the assets of the Corporate Debtor, which are subject to security interest, have become part of the Liquidation estate.

The Applicant further submits that the Liquidator has made the Applicant as a part of Stakeholder’s Consultation Committee in accordance with Regulation 31A which specifically mentions that “Provided a secured creditor who has not relinquished his security interest under section 52 shall not be part of the consultation committee”. By making the Applicant a member of Consultation Committee the Liquidator has already accepted it as a secured creditor who has not relinquished its security interest and cannot now dispute the said position. Moreover, the Liquidator is obligated by Regulation 31A(5) and 34(5) of the Liquidation Regulations to provide access to all relevant records to the Applicant. Similarly, when the Applicant requested to provide the minutes of all the SCC meetings, the liquidator refused and stated that the Applicant was not a part of the Stakeholders Consultation Committee hence minutes and notice were not shared with the Applicant. The Applicant further submits that the Liquidator has failed to understand that the Applicant has been admitted to the SCC and the Liquidator is duty bound to provide all the relevant records.

The Applicant submits that the Liquidator/respondent is blowing hot and cold at the same time, as the liquidator mentions that the Applicant has not relinquished security interest in the assets of the corporate debtor and therefore will be paid by the liquidator in accordance with Section 53(1)(e) and simultaneously also considers the Applicant as a secured creditor under section 53 and denies any amount to be paid to the Applicant on pro-rata basis. As neither the applicant has taken any steps to realise its security interest nor the Respondent has called upon to do so and as such by operation of law the Applicant’s Security interest has formed part of the liquidation estate. Therefore, the Applicant falls under Section 53(1)(b)(ii) of the Code.

The Applicant has been wrongly treated as a creditor under section 53(1)e(ii) of the Code for the purpose of the distribution of the assets of the Corporate Debtor.

The Respondent/Liquidator has filed a detailed reply and has submitted that in view of the proviso to Regulation 31A(2) of the Liquidation Regulations, the Applicant is not and cannot be a member of the SCC of the Corporate debtor since it had chosen not to relinquish its security interest to the liquidation estate of the Corporate Debtor. The inclusion of the Applicant as a member of the SCC and participation in some SCC meetings was the result of an inadvertent error which has been rectified and the corrected report with respect to the reconstitution of the SCC has been taken on record by order dated 30.01.2023 passed in IA/321/2023.

The Respondent further submits that as per the Code read with the Liquidation Regulations, the onus is on the secured creditor who opts out of the liquidation proceedings to take steps to realize its security interest. There is no provision in the Code or the Liquidation Regulations which compels the Liquidator to ask and/or follow up with a secured creditor who opts out of the liquidation process to take steps to realize its security interest. On the contrary, it is evident from a reading of Section 52 of the Code as also the provisions of Regulation 21A and Regulation 37 of the Liquidation Regulations that the onus is on the secured creditor who does not relinquish its security to realise its security interest.

The Respondent submitted that SIDBI’s charge on the Corporate Debtor’s movable assets is only residual in nature and those lenders having first charge on assets of the Corporate Debtor are not getting paid in full in the present case, therefore, value of SIDBI’s security and the amount payable to SIDBI under Section 53 of the Code would be NIL even if SIDBI had relinquished its security interest to the liquidation estate. That is why Liquidator did not raise any demand on SIDBI for contributing towards liquidation cost under Regulation 21A of the Liquidation Regulations.

The Respondent further submits that the Applicant had indicated in its claim form that Applicant is not relinquishing its security interest to the liquidation estate and in the absence of any steps taken by the Applicant to participate in the liquidation proceedings of the Corporate Debtor, the Applicant cannot now, after over three years, claim benefit from its own failure to realise its security interest.

The Liquidator further submits that Regulation 21A was introduced in the Liquidation Process Regulations by way of IBBI Notification No. IBBI/2019-20/GN/REG047 dated 25.07.2019 and subsequently amended by way of notification No. IBBI/2019-20/GN/REG053, dated 06.01.2020. The provisions of Regulation 21A requiring a secured creditor to inform the liquidator, by way of its claim form, as to whether it was relinquishing its security interest to the liquidation estate or realising its security interest outside the liquidation process and the provisions regarding contribution of amounts specified in Regulation 21A(2) were introduced in the interest of conducting the liquidation process in a certain and time bound manner. It cannot be read in a manner so as to benefit a creditor such as the Applicant who had clearly intimated over three years back that it was not relinquishing its security interest to the liquidation estate of the Corporate Debtor. The Liquidator finally submits that the Applicant is therefore covered under Section 53(1)(e)(ii) of the Code for the purpose of waterfall mechanism under the Code.

We have considered the submissions of the Ld. Counsel for the parties and perused the record.

We have carefully examined the provisions of the Code and the Regulations, relevant for adjudication of the present case which are Section 52, 53 and Regulation 21A of the Liquidation Regulations and are reproduced below for ease of reference:

Section 52(1) has two alternate clauses. Clause (a) covers a situation when Secured Creditor relinquished its security interest and Clause (b) covers the situation when Secured Creditor realises its security interest in the manner specified under Section 52. A secured creditor has been given an option either to relinquish its security or to realise its security. Correspondingly, there are two categories of secured creditors under section 53(1) of the Code:

Based on the option exercised by the secured creditor under section 52(1)(a) or 52(1)(b), they are separately covered under two distinct categories. First category of the secured creditors is those who have relinquished the security interest under section 52(1)(a) of the Code and are covered under section 53(1)(b)(ii), who shall rank equally between and among the workmen’s dues for the period of twenty-four months preceding the liquidation commencement date as mentioned under 53(1)(b)(i).

The second category is debts owed to secured creditors for any amount unpaid following the enforcement of security interest – for those secured creditors who exercised the option under section 52(1)(b) are covered under 53(1)(e)(ii) who would shall rank equally between and among any amount due to the Government for the period of two years preceding the liquidation commencement date.

The scheme of the Code is clear. The secured creditor has to either relinquish the security interest and be covered under section 53(1)(b)(ii) or enforce it and for balance due fall under section 53(1)(e)(ii). There is no third option for a secured creditor either under section 52 or under section 53 nor is there any deeming provision that in case the secured creditor, after having exercised its option under 52(1)(a) not to relinquish security interest, if fails to realise the security interest then it would be deemed to have relinquished the secured interest and its debt would be covered under section 53(1)(b)(ii). In the present case, the Applicant having exercised its option under section 52(1)(a) not to relinquish the security interest is covered under section 53(1)(e)(ii).

A Secured Creditor falls under Section 53(b)(ii) only when the secured creditor has relinquished security in the manner specified in section 52. However, in the present case, the Applicant opted not to relinquish the security interest in the assets of the Corporate Debtor and indicated ‘NO’ in column 8A, which pertains to whether security interest is relinquished in Form D. Therefore, at this stage, the Applicant cannot assert that they will be covered under Section 53(b)(ii) for distribution of assets.

The Applicant’s reliance on Regulation 21A(3) of the Liquidation Regulations to contend that the asset which were subject to security interest, have become part of liquidation estate and therefore by operation of law it should be covered under 53(1)(b)(ii) is mis-conceived. Regulation 21A is reproduced below:

Regulation 21A, was introduced w.e.f. 25.07.2019. Prior to this there was no clarity about timeline within which the secured creditor could take decision about exercising its option under section 52. The purpose of insertion of this Regulation appears to be to discipline the secured creditors to take timely decision as to whether to relinquish or to realise its security interest. If a secured creditor fails to intimate its decision within thirty days from the liquidation commencement date, the assets covered under the security shall become part of liquidation estate.

As per sub-regulation (2) of Regulation 21A, if the Secured Creditor proceeds to realise its security then it shall pay to the liquidator within 90 days from the liquidation commencement date, as much amount as would have been payable under Section 53 as if it had relinquished the security interest. Further timeline of 180 days is provided payment of excess realised value of assets. The First proviso states that where amount payable is not certain, Secured Creditor will pay the amount as estimated by the Liquidator.

As per sub-regulation (3) of Regulation 21A, if the Secured Creditor fails to comply with Sub Regulation (2) then the asset, which is subject to security interest shall become part of liquidation estate. In other words, if the Secured Creditor realises its security interest but fails to pay its share towards CIRP cost under section 53(1)(a) and towards workmen’s dues u/s 53(1)(b)(i), then such assets shall become part of liquidation estate which are subject to security interest. In the absence of timeframe for the secured creditors to intimate their decision, it would hinder the time bound process of liquidation.

In the present case, the Applicant, a secured creditor has already intimated the Liquidator its decision not to relinquish its security interest, in Form D. Therefore it is not open to the Applicant to now claim after three years that since they failed to comply with Regulation 21A(2), therefore by virtue of sub-regulation (3) they should be deemed as creditors having relinquished the security interest for the purpose of distribution of assets of the Corporate Debtor. This is neither expressly provided in the Code or Regulations nor can be the intent of the Code. Any other interpretation would encourage the secured creditors to exercise option under section 52(1)(b) i.e. not to relinquish the security interest and then wait and watch before enforcing its security interest and in case of its failure to take timely action, it would claim to be covered under section 53(1)(b)(ii) which cannot be the intent of the Code. If a secured creditor has exercised option under section 52(1)(a) i.e. relinquished the security interest, then consequently its position would be under 53(1)(b)(ii) and if a secured creditor has exercised option 52(1)(b) i.e. not to relinquish the security then its position would be under 53(1)(e)(ii).

There is another aspect to the present case. The nature of the security interest was residual charge on the movable and current assets of the Corporate debtor. The Second Charge holder is sub servient to the First Charge holder and is dependent on satisfaction of the First Charge Holder from proceeds of such assets which may not be sufficient to pay to the second charge holder. In such case also, the Applicant would be a secured creditor falling under section 53(1)(e)(ii).

From whatever angle we see on the plain reading of Sections 52, 53 and Regulation 21A or applying the intent and object of the Code, the Applicant is covered under 53(1)(e)(ii) of the Code.

In the email dated 28.10.2022 addressed to the Liquidator the Applicant has relied on judgment of Hon’ble NCLAT in the matter of Bala Techno Industries Ltd. (Comp. App. (AT)(Ins.) No. 547 of 2022). However, at the time of oral submissions, the counsel only relied on the provisions of Code and Liquidation Regulations and did not press on any case law. We have considered the judgments of Bala Techno Industries Ltd. and Technology Development Board Vs. Mr. Anil Goel & Ors. as mentioned in the email exchange of the Applicant and the Respondent. None of those judgments are applicable in the present case as in those cases, the facts were different as secured creditor there had relinquished the security interest and was claiming full value of security instead of what is provided under section 53 of the Code.

Further, the Regulation 21A was introduced in the interest of conducting the liquidation process in a certain and time bound manner. Therefore, the Applicant, who decided not to relinquish its security interest, cannot now, after a lapse of over three years, seek to benefit from its own failure to realize security interest. It is fundamental principal of law that one cannot derive advantages or benefits from their own wrongdoing/failure. For the afore mentioned reasons, we are unable to agree with the Applicant that they are entitled to receive the sale proceeds of assets of Corporate Debtor in proportionate to the claims of Secured Creditors as distributed to other secured creditors in terms of Section 53(1)(b)(ii) of IBC Code, 2016.

Accordingly, the present Application- IA/555/2023 is hereby dismissed.